The government has just announced that developers will have more access to underused brownfield land/sites and, in particular, the “smaller scale” house builders will benefit from these opportunities. They will directly commission thousands of new affordable homes to be built on publicly-owned land to enable homes to be built at a faster rate by smaller building firms, where planning consent will already be in place. The fact that planning will already be in place is a very significant plus point.
In addition, a £1.2bn Starter Home Fund will "fast track" the development of 500 small sites suitable for SME house builders over the next five years. Encouraging signs then, so we wait to see how and when this filters through the system.
The very buoyant development finance marketplace saw a good number of both new and existing lenders set their stall out to display their latest offerings during 2015.
As the months passed, it became less of a surprise to hear that yet another lender was offering where they wouldn't have previously, both in terms of geography and loan to cost or loan to value. Perhaps the best-established lenders haven't necessarily had to tweak their proposition too much, but those aiming to get a stronger foot hold certainly have.
The high street banks are still generally capping facilities at 60% of costs, with the specialist lenders offering up to 80% of costs or 65% of GDV (whichever is lower). Naturally, the banks are still the cheapest source of finance, but many developers have now experienced the different types of lenders in the marketplace, and often prefer to pay a premium for the flexibility and speed of decision making which the agile specialist sector can provide.
We saw fewer requirements for mezzanine funding last year with stretched senior debt coming into play more frequently, largely because stretched senior debt only involves one funder instead of two, and at a comparable blended cost. That said, more equity players are coming into the picture and indeed, some senior debt lenders seem more willing to introduce known equity contacts to unlock a scheme if a developer is left short. The resistance of some of the more institutional lenders to entertain third party equity participation seems to be relaxing somewhat.
Last year saw a significant number of joint venture projects successfully funded throughout the country. We get regular calls from developers who are interested in "joint venture", and these can include scenarios where a developer partners up with a landowner or a contractor, as well as the 100% funded acquisition and build deals. Experienced developers are therefore now able to take advantage of opportunities which they otherwise might not have been able to if all their capital is tied up elsewhere.
It's fair to say that coverage truly is nationwide, with some smaller boutique lenders even covering the Highlands and islands of Scotland, and the south west of England, where most lenders just wouldn't travel to.
So what impact has all this activity had on rates? Away from the high street, interest rates for development loans at 6.5% to 7% per annum are available, and in some instances with no exit fees. At this level, developers can borrow 75% to 80% of project costs. There truly is an abundance of lenders on or around this tier, and rates vary dramatically dependent on location, size and developer profile. The bridging lenders who have entered the space are now also pitching at sub 1% per month for development facilities, and exit fees seem to be dropping away regularly.
The latter part of last year saw a good deal of enquiries where developers were looking to refinance away from an existing development facility, predominantly due to a longer sales period being required, a breakdown in the relationship with the existing lender or unforeseen circumstances leading to lost time. This is where the bridging lenders have fitted in nicely and will continue to do so.
We are only a few days into the year, but evidently all the reputable and professional links in the chain are very busy, and long may it continue.
Attributed to John Waddicker, Director at Positive Commercial Finance
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